D P Singh attributes SBI MF’s rise to the No.3 position by AuM to its focus on simplicity, on a solutions based approach and an unrelenting focus on bringing in new investors into the industry.

Changing regulations will mean margin contraction for distributors. Need of the hour is to adopt a holistic approach to enhance wallet share – a reorientation from revenue per product to revenue per client.

Bulk of IFAs have a sharp focus on high revenue bearing equity oriented products, and have traditionally given less focus to debt, given the lower distribution margins.

Debt funds offer lower commissions than equity. However, with investors allocating 4X more to debt than equity, 50% lower commissions on debt funds will anyway translate to 2X more in terms of total commissions

Solutions based sales and wallet share oriented client engagement will enable distributors to more than make up for margin contraction

WF: Heartiest congratulations on SBI MF taking the 3rd position in the AuM league tables. In the context of a fairly challenging year for markets in 2018, it has been a great year for business from SBI MF’s point of view. When you look at the year gone by, what would you say are the biggest learnings for all of us? What are some of the strategies that have paid off for you?

DP Singh: 2018 has been a good business year for us, but we have also lots of learnings from the year. The first learning for all of us in the industry – fund houses as well as distributors - is that we cannot concentrate on one asset class. Building a diversified business is as important for us as building a diversified portfolio is important for investors.

The best way to build a diversified business is to focus on solutions, not products. We were able to execute some solutions successfully, which enabled us to achieve higher wallet share by selling 2-3 schemes across asset classes, instead of the traditional mode of 1 scheme per investor. Solutions also help all of us – investors, distributors and fund houses – to deal with the kind of market volatility which we witnessed in 2018.

The second learning from 2018 is the need to keep your communication around SIPs high throughout the year, especially during times of market volatility. If we want investors to maintain their SIP discipline through challenging periods like we saw in 2018, the onus is on us – fund houses and distributors – to maintain high levels of engagement with investors at times when that discipline gets challenged by market volatility.

If I look back at 2018, I don’t think we did anything fancy – we have just focused on maintaining simplicity in our products, solutions and communication. Simplicity is a mantra that works very well for all stakeholders in the investments business, and for investors too.

In 2018, our market share grew by nearly 200 bps – from 9.4% to 11.2%. What is more relevant in the way we measure our business performance is that over 32% of all new KYCs among CAMS serviced fund houses (which would imply around 20% at an industry level), came from SBI MF. Contributing 20% of all new investors who came into the industry in 2018, for us, means a lot more than moving up to the 3rd position in terms of AuM. Simplicity in our overall approach and an unwavering focus on market expansion is what I think enabled us to lead the industry’s efforts on new investor acquisition.

WF: You have been very vocal on the importance of proper communication and sales process on credit risk funds. This category came into sharp focus post the IL&FS episode. What are some of the lessons that we as an industry must take way from this episode and its aftermath?

DP Singh: I think the most important lesson is to stay away from the desire to focus on portfolio yield as the biggest sales driver. Our credit risk fund has always had 20-30 bps lower portfolio yield than the highest. While this represents a sales challenge for our team, we strongly believe in the need to ensure that the fund management team is entirely comfortable with portfolio quality and is never put under any business pressure to top the yield tables to drive sales.

We have to understand that in products that are inherently more risky, it is even more important to maintain a conservative portfolio stance. Aggressive management of a risky product is a toxic combination. That is a lesson well imbibed by our entire team, and I believe this is paying off for us and for our investors.

WF: Distributors – particularly small IFAs – are worried about margin shrinkage consequent to implementation of recent regulatory changes on TER, upfront commissions and scheme expense accounting. To what extent do you see business outlook for IFAs getting impacted by these changes?

DP Singh: It is a very challenging time and to sail through these difficult times is not easy. The blow on revenues has come from multiple sources. The scheme expense accounting regulation does not now allow us to bear a part of distribution cost from our AMC P&L. Then there is the GST set off aspect which is now not available on distribution commissions. And from April, TERs will go down on large schemes by 20-30 bps.

The net impact is that for large funds whose regular plan TER was around 2%, the impact is around 40 bps – which is a huge 20% cut on revenue – across the entire AuM of the scheme. That is a huge impact, and no fund house is in a position to absorb it in their books. A large part will be passed on to distributors by way of lower trail fees – that is the reality.

Adversity can either bring in despondency or can spur one to raise one’s game. I would like to see this adversity as an opportunity for IFAs to raise their game. Many of the small IFAs have tended to focus on a narrow product range. Most sell only equity funds and don’t sell debt funds, many sell only SIPs within equity funds. They have a healthy book of clients, but poor wallet share from these clients. One of the key drivers of this narrow product range is the focus on revenue per product. The need of the hour is to move from revenue per product to revenue per client. Most Indian investors have invested less than 10% of their portfolio in equity assets. For an IFA who earned 1% on this 10%, and is now looking at the prospect of trail going down by 20%, there is an untapped opportunity to intermediate on at least another 40% of his client’s portfolio. That is 4X more in terms of volume, but comes with commissions that are half or one-third of what you earn from equity funds. If you just do the homework, you will realize that 50% lower commission on 4X more volume is actually 2X more in terms of overall revenue. There is actually an opportunity to earn more from debt funds than from equity funds – contrary to popular perception that debt funds are not remunerative. Many of the successful IFAs have embraced this wallet share concept long ago, and have built large and well diversified AuM for themselves. I would urge every IFA who is currently feeling despondent due to these regulatory changes, to emulate their more successful IFA peers, embrace wallet share as the key philosophy, and broaden their product suite irrespective of whether some products pay out less commissions than others. Volumes will overcome margin contraction only when you are active across the entire range of MF products across equity, debt and liquid funds.

This will mean a reboot for many distributors. We at SBI MF will be working very closely with IFAs through this year to help them in this reboot process. The need of the hour is to engage with investors more holistically, adopt a solutions based sales approach, have a sharp focus on increasing wallet share to drive up revenues per client and embrace technology fully to better serve a growing client base. In fact, more and more fund houses are realizing the need for a solutions based approach and introducing tools and features which enable the distributor to market mutual funds comprehensively. We have recently introduced a facility called SBI Multi Select through which distributors can plan for their clients more holistically with schemes across asset classes and risk profiles. We will endeavour to support our distribution partners through every aspect of this process.